The Four Things a Service Business Must Get Right - Harvard Business Review PDF

Extensive study of the world’s The best service companies reveals the principles on Four Things which they’re built. a Ser...

Extensive study of the world’s The best service companies reveals the principles on Four Things which they’re built. a Service Business Must Get Right by Frances X. Frei AS THE WORLD’S MAJOR ECONOMIES Let me submit that some new tools have matured, they have become dom- are necessary. When a business takes a inated by service-focused businesses. product to market, whether it’s a basic But many of the management tools commodity like corn or a highly engi- and techniques that service managers neered offering like a digital camera, use were designed to tackle the chal- the company must make the product Jason Lee lenges of product companies. Are these itself compelling and also field a work- sufficient, or do we need new ones? force capable of producing it at an 70 Harvard Business Review | April 2008 | hbr.org 1084 Frei.indd 70 3/4/08 10:12:24 PM  hbr.org | April 2008 | Harvard Business Review 71 1084 Frei.indd 71 3/4/08 10:12:31 PM  The Four Things a Service Business Must Get Right attractive price. To be sure, neither job is easy to do well; may attribute convenience or friendly interaction to your enormous amounts of management attention and academic service brand. They may compare your offering favorably research have been devoted to these challenges. But deliver- with competitors’ because of extended hours, closer proxim- ing a service entails something else as well: the management ity, greater scope, or lower prices. Your management team of customers, who are not simply consumers of the service must be absolutely clear about which attributes of service but can also be integral to its production. And because cus- the business will compete on. tomers’ involvement as producers can wreak havoc on costs, Strategy is often defined as what a business chooses not service companies must also develop creative ways to fund to do. Similarly, service excellence can be defined as what a their distinctive advantages. business chooses not to do well. If this sounds odd, it should. Any of these four elements – the offering or its funding Rarely do we advise that the path to excellence is through in- mechanism, the employee management system or the cus- ferior performance. But since service businesses usually don’t tomer management system – can be the undoing of a ser- have the luxury of simply failing to deliver some aspects of vice business. This is amply demonstrated by my analysis their service – every physical store must have employees of service companies that have struggled over the past de- on-site, for example, even if they’re not particularly skilled cade. What is just as clear, however, is that there is no “right” or plentiful – most successful companies choose to deliver a way to combine the elements. The ap- propriate design of any one of them depends upon the other three. When we look at service businesses that have grown and prospered – companies like Service excellence can be defined Wal-Mart in retail, Commerce Bank in as what a business chooses not banking, and the Cleveland Clinic in health care – it is their effective inte- to do well. gration of the elements that stands out more than the cleverness of any ele- ment in isolation. This article outlines an approach for crafting a profitable subset of that package poorly. They don’t make this choice service business based on these four critical elements (col- casually. Instead, my research has shown, they perform badly lectively called the “service model”). Developed as a core at some things in order to excel at others. This can be consid- teaching module at Harvard Business School, this approach ered a hard-coded trade-off. Think about the company that recognizes the differences between service businesses and can afford to stay open for longer hours because it charges product businesses. Students in my course learn to think more than the competition. This business is excelling on con- about those differences and their implications for manage- venience and has relatively inferior performance on price. ment practice. Above all, they learn that to build a great The price dimension fuels the service dimension. service business, managers must get the core elements To create a successful service offering, managers need of service design pulling together or else risk pulling the to determine which attributes to target for excellence and business apart. which to target for inferior performance. These choices should be heavily informed by the needs of customers. Managers should discover the relative importance custom- 1 The Offering ers place on attributes and then match the investment in The challenge of service- excellence with those priorities. At Wal-Mart, for example, business management be- ambience and sales help are least valued by its customers, gins with design. As with low prices and wide selection are most valued, and several product companies, a ser- other attributes rank at points in between. (See the exhibit vice business can’t last long “Wal-Mart’s Value Proposition” in David J. Collis and Michael if the offering itself is fatally G. Rukstad’s article “Can You Say What Your Strategy Is?” in flawed. It must effectively this issue.) The trade-offs Wal-Mart makes are deliberately meet the needs and desires of an attractive group of cus- informed by these preferences. The company optimizes spe- tomers. In thinking about the design of a service, however, cific aspects of its service offering to cater to its customers’ managers must undergo an important shift in perspective: Whereas product designers focus on the characteristics buy- Frances X. Frei ([email protected]) is an associate professor of busi- ers will value, service designers do better to focus on the ness administration in the Technology and Operations Management experiences customers want to have. For example, customers unit at Harvard Business School in Boston. 72 Harvard Business Review | April 2008 | hbr.org 1084 Frei.indd 72 3/4/08 10:12:40 PM  priorities, and it refuses to overinvest in underappreciated attributes. The fact that it takes a drubbing from competi- 2 The Funding Mechanism tors on things its customers care less about drives its overall All managers, and even most cus- performance. tomers, agree that there is no The phenomenon, of course, has a circular aspect. Shop- such thing as a free lunch. Excel- pers whose preferences match Wal-Mart’s strengths self- lence comes at a cost, and the select into its customer base. Meanwhile, those who don’t cost must ultimately be covered. prefer Wal-Mart’s attributes buy elsewhere. It is important With a tangible product, a compa- therefore to identify customer segments in terms of attri- ny’s mechanism for funding superior bute preferences – or as some marketers prefer, in terms performance is usually relatively simple: the price tag. Only of customer needs. Identifying what might be called cus- the customers who forfeit the extra cash can avail them- tomer operating segments is not the same exercise as tradi- selves of the premium offering. In a service business, devel- tional psychographic segmentation. Rather than stressing oping a way to fund excellence can be more complicated. differences that enable increasingly targeted and potent Many times, pricing is not transaction based but involves messaging, this type of segmentation aims to find popula- the bundling of various elements of value or entails some tions of customers who share a notion of what constitutes kind of subscription, such as a monthly fee. In these cases, excellent service. buyers can extract uneven amounts of value for their money. Once an attractive customer operating segment is found, Indeed, even nonbuyers may derive value in certain service the mission is clear: Management should design a new offer- environments. For example, a shopper might spend time ing or tweak an existing one to line up with that segment’s learning from a knowledgeable salesperson, only to leave preferences. Look, for example, at the fit achieved by Com- the store empty-handed. merce Bank, which has been able to grow its retail customer In a service business, therefore, management must give base dramatically even though its rates are among the worst careful thought to how excellence will be paid for. There in its markets and it has made limited acquisitions. Com- must be a funding mechanism in place to allow the company merce Bank focuses on the set of customers who care about to outshine competitors in the attributes it has chosen. In my the experience of visiting a physical branch. These customers study of successful service businesses, I’ve seen the funding come in all shapes and sizes – from young, first-time bank- mechanism take four basic forms. Two are ways of having ing clients to time-strapped urban professionals to elderly the customer pay, and two cover the cost of excellence with retirees. As an operating segment, however, they all believe operational savings. that convenience is a bank’s most important attribute and Charge the customer in a palatable way. The classic ap- choose Commerce Bank because of its evening and week- proach to funding something of value is simply to have the end hours. Second most important to them is the friendli- customer pay for it, but often it is possible to make the form ness of interactions with employees, and so the promise of that payment takes less objectionable to customers. Rarely a cheerful, familiar teller has become part of the bank’s is that done with à la carte pricing for the niceties. A large core offering. Commerce has added to its branch ambience part of Starbucks’s appeal is that a customer can linger al- with interior elements both lovely (high ceilings and natural most indefinitely in a coffeehouse setting. It’s unthinkable light) and fun (an amusing contraption for redeeming loose that Starbucks would place meters next to its overstuffed change). When it comes to attributes less important to the chairs; a better way to fund the atmosphere is to charge bank’s customers – price and product range – management more for the coffee. Commerce Bank is open late and on is willing to cede the battle to competitors. weekends – earning it high marks on extended hours – and It is tempting to think, “If I’m a really good manager, it pays for that service by giving a half percentage point less then I don’t have to cede anything to the competition.” This in interest on deposits. Could it fund the extra labor hours well-intentioned logic can lead, ironically, to not excelling by charging for evening and weekend visits? Perhaps, but a at anything. The only organizations I have seen that are slightly lower interest rate is more palatable. Management superior at most service attributes demand a price premium in any setting would do well to creatively consider what of 50% over their competitors. Most industries don’t support feels fair to its customers. Often, the least creative solution this type of premium, and so trade-offs are necessary. I like is to charge more for the particular service feature you are to tell managers that they are choosing between excellence funding. paired with inferior performance on one hand and medi- Create a win-win between operational savings and ocrity across all dimensions on the other. When managers value-added services. Very clever management teams dis- understand that inferior performance in one dimension fu- cover ways to enhance the customer experience even while els superior performance in another, the design of excellent spending less (finding, in other words, that there can be such service is not far behind. a thing as a free lunch). Many of these innovations provide hbr.org | April 2008 | Harvard Business Review 73 1084 Frei.indd 73 3/4/08 10:12:47 PM  The Four Things a Service Business Must Get Right only a temporary competitive advantage, as they are quickly Removing time is often fruitful, since it can directly improve recognized and copied. Some are surprisingly durable, how- service even as it cuts costs. ever. An example is the immediate-response service provided Spend now to save later. Often it is possible, if somewhat by Progressive Casualty Insurance. When someone insured by painful, to make operational investments that will pay off Progressive is involved in an auto accident, the company im- eventually by reducing customers’ needs for auxiliary ser- mediately sends out a van to assist that person and to assess vice in the future. A classic example is Intuit’s decision to the damage on the spot – often arriving on the scene before provide free customer support, in defiance of the software the police or tow trucks. Customers love this level of respon- industry norm. Call centers are expensive to staff because siveness and give the company high marks for service. But of the combination of technical knowledge and sociability in anticipation of such a need someday, would they pay more in insurance pre- miums? Unfortunately, no. People are pathologically price sensitive about car If a self-service option is truly insurance and almost never select any- thing but the rock-bottom quote. The preferable, customers should be key to Progressive’s ability to fund this willing to take on the work for service is the cost savings it ultimately nothing or even pay for the privilege. yields. Normally insurance providers are subject to fraud, with criminals making claims for accidents that were staged or never happened. Because of these and other types required to field inquiries effectively. Customers meanwhile of disputed claims, firms also incur high legal fees – which, are extremely uneven in their neediness vis-à-vis informa- combined with the other costs of fraud, add up to some $15 tion technology. For most software makers this adds up to out of every $100 in insurance premiums across the industry. the obvious conclusion that customers should be charged Since deploying its vans, Progressive has seen costs in both for support. categories plummet. Sending a company representative to Intuit founder Scott Cook sees the matter differently. the scene pays for itself. Those needy calls, he believes, are a useful form of input Progressive offers another customer convenience that to continued product development – the engine of future many competitors have so far shied away from: giving revenues – and that justifies an even greater expense outlay. quotes from other providers alongside its own when a po- Intuit has its higher salaried product-development people, tential buyer inquires about the cost of insurance. It’s not not solely customer service people, fielding calls so that sub- that Progressive is determined to go one better than rivals sequent versions of its offerings will be informed by direct to win the business. In fact, Progressive’s is the lowest quote knowledge of what users are trying to accomplish and how only about half the time. What Progressive does believe is they are being frustrated. This is part of a broader commit- that its quote is the right one given the probability of that ment to feedback-driven improvement that Cook refers to as person’s getting into an accident – a probability that the in- “DIRST” – for “do it right the second time.” The investment surer is best in class at determining. If indeed its quote is has paid off in better software, which means a lower call spot-on, then allowing a competitor to insure the customer volume. “Our competition thinks we’re crazy,” Cook says, and at a lower rate is doubly effective: It frees Progressive from he understands why. “If we got as many calls as they do, we’d a money-losing proposition while burdening its competitor be out of business.” with the unprofitable account. Thus a level of service that Have the customer do the work. One other type of fund- looks downright altruistic to the customer actually benefits ing mechanism for enhanced service puts the cost back in the company. This is an example of leveraging operations the customer’s court, but in the form of labor. Offering self- into a value-added service. service, from pump-your-own gas to self-managed broker- How can your management team find win-win solutions age accounts, is a well-established way to keep costs low. If of its own? When I pose this question to managers, their the goal is service excellence, though, you must create a impulse is to imagine what new value could be created for situation in which the customer will prefer the do-it-yourself customers and then to ponder how that could be funded capability over a readily available full-service alternative. through cost savings. I suggest beginning instead by asking, Airlines have achieved this, at last, with flight check-in kiosks, “Where are our biggest cost buckets?” With these in mind, although the value proposition they initially presented was managers can then simultaneously determine how to reduce dubious. At first, passengers felt compelled to use the rela- costs and create a value-added service. A good first place tively unappealing kiosks only because carriers had allowed to look? Anywhere that time is a large component of cost. the lines in front of manned desks to become intolerable. 74 Harvard Business Review | April 2008 | hbr.org 1084 Frei.indd 74 3/4/08 10:12:52 PM  Today, however, frequent fliers prefer the kiosks because they the executive decided to become a frontline employee provide readier access to useful tools like seat maps. Businesses herself for a month. She thought it would take that much looking to achieve service excellence in other settings time to experience a typical range of service interactions should not take such an indirect route. They should set and see the roots of the problem. In fact, it took one day. themselves the challenge of creating self-service capabilities “From the time the doors opened, customers were yelling that customers will welcome. Indeed, if a self-service option at me,” she reported. “By the end of the day, I was yelling is truly preferable, customers should be willing to take on back.” What became clear was that employees were set up the work for nothing or even pay for the privilege. When to fail. Recent cross-selling initiatives had created a set of managers designing self-service solutions are not permitted customers with more complex needs and higher expecta- to add the inducement of price discounts, they are forced to tions for their relationship with the bank, but employees focus on improving the customer experience. had not been equipped to respond. As a result of decisions Whatever funding mechanism is used to cover the costs made by the management team (all individually sensible), of excellence, it is best thought out as thoroughly as possible the typical employee did not have a reasonable chance prior to the launch of a new service, rather than amended of succeeding. The bank’s employee management system in light of experience afterward. When a service that’s been was broken. perceived as free suddenly has fees associated with it, cus- If your business requires heroism of your employees to tomers tend to react with disproportionate displeasure. And keep customers happy, then you have bad service by de- since companies cannot thrive by offering service gratis, it sign. Employee self-sacrifice is rarely a sustainable resource. is vital that they not set expectations that can’t be sustained. Instead, design a system that allows the average employee With careful analysis and design, a company can offer and to thrive. This is part of Commerce Bank’s competitive for- fund a better service experience than its customers would mula. Recall that the bank chooses to compete on extended enjoy elsewhere. hours and friendly interactions and not on low price and product breadth. Now think how that strategy could inform employee management; the implications are not hard to 3 The Employee Management System imagine. For instance, Commerce concluded that it didn’t Companies often live or die on the quality of their workforces, require straight-A students to master its limited product but because service businesses are typically people intensive, set; it could hire for attitude and train for service. In job a relative advantage in employee management has all the interviews, its managers could use simple weed-out criteria – more impact there. Top management must give careful at- like “Does this person smile in a resting state?” – rather tention to recruiting and selection processes, training, job than trying to maximize across a wide range of positive design, performance management, and other components characteristics. The bank’s current employees could be de- that make up the employee management ployed as talent scouts, on the principle that it takes one system. More to the point, the decisions to know one. (When people from Commerce see someone made in these areas should reflect the providing great service in another setting, whether at a res- service attributes the company aims to taurant or at a gas station, they hand out a card printed be known for. with a compliment and a suggestion to consider working To design a well-integrated employee for Commerce.) management system, start with two It’s a simple reality that employees who are above aver- simple diagnostic questions. First: What age in both attitude and aptitude are expensive to employ. makes our employees reasonably able to They are not only attractive to you but also attractive to achieve excellence? And then: What makes our employees your competitors, which drives up wages. A business that reasonably motivated to achieve excellence? Thoughtfully wants to maintain a competitive cost structure will prob- considered, the answers will translate into company-specific ably need to compromise on one quality or the other (or, policies and programs. Companies that neglect to connect if it insists on having both, find a way to fund that luxury). the dots between their employee management approaches If, as Commerce Bank does, you choose to hire for attitude, and customers’ service preferences will find it very hard to then you must engineer things so that even lower-aptitude honor their service promises. employees will reliably deliver great service. Like managers At one large international retail bank I studied, a se- who don’t want to admit that their service is designed to be nior manager had come to a depressing realization. “Our inferior on some attributes, many people are reluctant to service stinks,” she told me. Under her guidance the bank acknowledge a trade-off between aptitude and attitude. But took various measures, mainly centering on incentives and failure to accommodate this economic reality in the design training, but the problem persisted. Customer experience of the employee management system is a common culprit in the branch did not improve. Perplexed but determined, in flawed service. hbr.org | April 2008 | Harvard Business Review 75 1084 Frei.indd 75 3/4/08 10:12:58 PM  The Four Things a Service Business Must Get Right dramatically simplified. By contrast, think of the self-service 4 The Customer Management System supermarket checkout. Here customers are asked not only In a service environment, employees aren’t the only people to do what trained employees have done previously but also affecting the cost and quality of service delivered. The cus- to shoulder the additional responsibility of fraud preven- tomers themselves can be in- tion through a complicated process of weighing bags. Asking volved in operational processes, customers to perform more-complicated tasks than higher- sometimes to a very large ex- skilled employees contributes to the disarray and anxiety tent, and their input influences that surrounds these checkout lines. their experiences (and often Customers also have a great deal of discretion in their op- other customers’ too). For ex- erational activities, usually far more than employees. When ample, an architectural firm’s a company introduces a new process that it wants employ- client may explain the purpose ees to use, it can simply issue a mandate. When customers of a new facility well or poorly, are involved, transitions like this can be significantly more and that will affect the efficiency of the design process and complicated. Look at Zipcar, the popular car-sharing service. the quality of the end product. A customer who dithers at To keep costs low, its service model depends on customers a fast-food counter makes the service less fast for everyone to clean, refuel, and return cars in time for the next user. behind him. Motivating employees to perform these tasks would be rou- Customer involvement in operations has profound im- tine; motivating customer-operators has required a complex, plications for management because it alters the traditional evolving mix of rewards and penalties. role of the business in value creation. The classic product- In managing customers in your operations, then, you’ll based business buys materials and adds value to them in need to address a few key questions: Which customers some way. The enhanced-value product is then delivered are you focusing on? Which behaviors do you want? And to customers, who pay to receive it. In a service business, which techniques will most effectively influence behavior? however, employees and customers are both part of the For example, a company whose business model depends on value-creation process. A main benefit is that customer customers’ timeliness – whether it’s a dental office packing labor can be far less expensive than employee labor. It its appointment calendar or a video store circulating hit can also lead to better service experiences. When students films – may use more- or less-heavy-handed tactics to ensure participate more in a classroom environment, for example, compliance. In a previous article for Harvard Business Review they learn more. But there are challenges, as well. Designing (“Breaking the Trade-Off Between Efficiency and Service,” a system that explicitly manages these challenges is essential November 2006), I related lessons from several companies to service success. that have used a range of techniques to modify customer Consider the issue of customer selection. Service designs behavior. These techniques can be divided into two basic cat- may call for customers to perform important tasks, but for egories: instrumental (the carrots and sticks we commonly the most part customers have no interview, no background see play out as discounts and late fees) and normative (the check, and no personality profile. As a former senior execu- use of shame, blame, and pride to motivate us to return tive from Nestlé now working in financial services put it, shopping carts and pick up trash even when no one is look- “I could control who was in my factory at Nestlé; I have no ing). The important thing is to manage customers in a way such control over the customers in my bank’s branches.” that is consistent with the service attributes you’ve chosen In addition, despite many organizations’ best efforts, cus- to emphasize overall. tomers are not as easy to train as employees. There are usu- ally many times more customers than employees, and creat- Integrating the Elements ing effective training materials for such a large, dispersed, Successful service companies have a working plan that incor- unpaid, and often irrelevantly skilled workforce is difficult. porates all four elements of service design. Within each of When this holds true, firms must accommodate the limited those areas, however, it is hard to spot any best practice. This training in the design of the service experience. If tasks are is because the whole business depends more on the intercon- shifted from employees to customers – from higher-skilled nection of the four than on any one element. to lower-skilled people – then they must be adjusted accord- A standout example of effective overall integration is ingly. Airlines seem to get this right. Recall (if you can) the the Cleveland Clinic, which is consistently ranked among last time you checked in with an agent at the full-service America’s most eminent hospitals and has been a leader in counter. Chances are you witnessed the agent complete a pioneering cardiac care for decades. It’s hard to put a finger dizzying sequence of keystrokes. It would not seem reason- on the source of that advantage. The fact that the clinic able to expect customers to perform these same steps, and so has specialty centers focusing on diabetes, for example, or when the check-in role was transferred to customers, it was cardiac care is not exceptional in itself. Its refusal to attach 76 Harvard Business Review | April 2008 | hbr.org 1084 Frei.indd 76 3/4/08 10:13:04 PM  THE SUCCESS OR FAILURE of a service busi- financial rewards to doctors’ productivity is unusual but ness comes down to whether it gets four might not be effective elsewhere. Step back from the de- tails, however, and the bigger picture emerges. Attracting the Diagnosing things right or wrong – and whether it balances them effectively. Here are some highest-severity patients means that doctors will always face Service a challenging environment in need of innovative solutions. questions that will sharpen managers’ Design thinking along each dimension and help Organizing into disease centers rather than narrower, more companies gauge how well their service traditional lines of specialization (such as kidneys or blood) models are integrated. sets the stage for cross-disciplinary collaboration – and thus for novel perspectives – within those centers. Removing 1 The Offering productivity incentives gives doctors license to spend time on innovation, which is enhanced by their close work with Which service attributes (convenience? friendliness?) does the firm target for excellence? specialists from other fields. The particular choices made on Which ones does it compromise in order to achieve methods, processes, and personnel are the right ones for the excellence in other areas? Cleveland Clinic because they complement one another and How do its service attributes match up with targeted come together in a smoothly operating system. customers’ priorities? Any service company, no matter how long established, can benefit from a review of its operations using the framework 2 The Funding Mechanism laid out in this article. Bringing the four elements of service Are customers paying as palatably as possible? design into tighter alignment can be an ongoing process of Can operational benefits be reaped from service small tweaks and experiments in change, inspired by the features? kinds of questions included in the sidebar “Diagnosing Ser- Are there longer-term benefits to current service vice Design.” A management team planning to launch a new features? service will find the framework particularly helpful. It flags Are customers happily choosing to perform work the decisions that should be made early and in tandem so (without the lure of a discount) or just trying to avoid that they don’t clash down the road. And at the highest level, more-miserable alternatives? it underscores two very important principles of service de- sign. First, there is no such thing as a good idea in isolation; 3 The Employee Management System there is only a good idea in the context of a specific service What makes employees reasonably able to produce model. Second, it is folly to attempt to be all things to all excellence? customers. What makes them reasonably motivated to produce The first point notes the importance of fit, mentioned excellence? earlier as a key strength of the Cleveland Clinic. At the clinic, Have jobs been designed realistically, given employee management knows that extensions to its core business must selection, training, and motivation challenges? be examined closely for their fit with its existing service model. The organization recently abandoned the concept of 4 The Customer Management System a high-end wellness and spa offering because it didn’t build Which customers are you incorporating into your on the hospital’s core operational strengths. In some ways operations? this seems like an obvious point, but managers often stray What is their job design? into areas of relative weakness, particularly when they see a What have you done to ensure they have the skills firm they consider to be a direct competitor succeeding with to do the job? a service they don’t yet offer. Progressive made this mistake What have you done to ensure they want to do the job? when it decided to venture into the home insurance market. How will you manage any gaps in their performance? No question, there is money to be made in home insurance, as innumerable firms have shown. But Progressive failed in its attempt because the challenges of that business did not The Whole Service Model match up with the company’s competitive strengths. Recall Are the decisions you make in one dimension supported by those you’ve made in the others? that Progressive is justifiably proud of its analytics advan- tage, which enables it to effectively size up the risk that a Does the service model create long-term value for customers, employees, and shareholders? given policyholder will file a claim. Unfortunately, that kind How well do extensions to your core business fit of actuarial prowess is not as central to making a profit on with your existing service model? insuring homes. Home insurers rise or fall on the manage- Are you trying to be all things to all people – or ment of their investment portfolios – and that is a relative specific things to specific people? weakness of Progressive. (Firms typically lose money on the hbr.org | April 2008 | Harvard Business Review 77 1084 Frei.indd 77 3/4/08 10:13:09 PM  The Four Things a Service Business Must Get Right insurance but make money investing pre- Are Focused paid premiums.) The fit, in retrospect, HIGHLY FOCUSED FIRMS are the bane of big, established was a bad one. It should have been seen Competitors companies. Because they laser-target certain customer that way early on. segments, they are able to optimize their service mod- Nipping at Just as common a failing is the mis- els. The service quality they provide, using specialized Your Flanks? guided desire to be all things to all employees and a customized product set, is potent. By people. In today’s service economy, it is contrast, incumbent firms typically attract a mix of custom- nearly impossible to design a service model ers, hire and develop a variety of employees, and – as a result to cover a huge range of customers and re- of excellent, well-intentioned suggestions from both groups – main competitive across them. Instead, firms should are rampant product proliferators. design their service models for more targeted excellence by being specific things to specific people. A Covering the waterfront like this can dilute your excel- Great service companies are, almost without excep- lence in every area. Companies that try to do it all… tion, very clever about selecting their customers. We saw this in Progressive’s highly informed choice of whom to do business with. Commerce Bank, from its begin- nings in 1973, knew it should stake out its own claim on the market. “The world,” its founder Vernon Hill said, “did not need another ‘me-too’ bank. I had no capital, no brand name, and I had to search for a way to dif- ferentiate from the other players.” Shouldice Hospital, a Canadian specialist in hernia operations, is highly selec- tive about its customer base. Not only does it serve just B …are vulnerable to attacks by highly focused entrants, patients experiencing a certain type of ailment, it has the who pick off niche businesses. luxury of operating on otherwise healthy people. It has Focused firms skimmed the cream of the market. Becoming a Multifocused Firm Inevitably, companies that attempt to be all things to all people begin to struggle when upstart competitors like Shouldice start picking off profitable niches. Often, the decline is not taken seriously until it’s too late. (See the sidebar “Coming to Terms with the Threat.”) However, some incumbents have managed to com- pete effectively with their more-focused rivals, and there C Your best defense is to concentrate on multiple niches, is much to learn from their experience. The common shoring them up with the economies gained through thread in their competitive responses to upstarts is internal shared services. the capacity to become “multifocused.” In other words, they stopped trying to cover the entire waterfront with a single service model. Instead they pursued multiple niches with optimized service models – each designed to achieve excellence on some dimensions at the expense of inferior performance on others. The secret to success in Customer a multifocused firm is the ability to benefit from having facing various service models under one house umbrella. This Back Nonshared benefit often comes in the form of shared services (that office (model-specific) is, internal service providers), which enable a firm to services generate economies of scale and economies of experi- Shared services ence across its service models. Effectiveness at utilizing Finance shared services to the advantage of the individual service Purchasing models can determine the success of a multifocused firm. IT (See the exhibit “Are Focused Competitors Nipping at HR Executive training Your Flanks?”) 1084 Frei.indd 78 3/4/08 10:13:15 PM  The shared services architecture can be seen in multifocused corporations across industries – from Yum Brands, HOW DO INCUMBENTS REACT Spotted in time, Coming to a collection of five fast-food companies, when a focused entrant appears the threat of focused Terms with to Omnicom, which consists of hun- on the scene? The usual response competitors can be seems to follow four distinct the Threat dreds of companies in the interactive- met effectively. Is marketing space, to GE, which seems stages of “strategic grief.” there a troubling area to have no limit on the markets it can Dismissal. The incumbent of competitive activ- enter. Each corporation has created perceives the entrant as a non- ity on your radar screen? distinct service models for distinct cus- threat. It is a deceptively easy If so, don’t be lulled by its small tomer operating segments and gauges assessment to make, given that scale and isolation. Move quickly the overall benefit of the models by as- the focused firm has optimized to understand what’s going on sessing how much they gain from one its service model to be deliber- there. In particular, focus on the another. What determines whether a ately good – and bad – at certain entrant’s rate of improvement company has assembled the right port- aspects of the incumbent’s along critical measures like market folio of service models? It comes down business. share, share of wallet, and service to a critical test: Is each of the firm’s Sadness. Next comes a sense quality. Benchmarks of absolute distinct service models better off as a of loss as profitable customers difference can fool managers into result of the others? If the answer is no, start to defect. They are willing, if believing that the threat is not im- it signals that performance is about to not eager, to make the trade-offs minent. But when a new competi- decline or that the company may want inherent in the entrant’s service tor improves faster than you do, to spin off some service models. If the model. the gap soon closes. answer is yes, it’s almost always thanks Relief. Sadness is replaced by Once you learn the threat to superior management of shared ser- relief as the realization dawns that is real, explore your potential vices, and the incumbent thrives. only one of the incumbent’s cus- advantages. Can you compete The services shared in multifocused tomer segments is being targeted effectively as a “multifocused” companies typically include business by the focused entrant. The new firm (one that targets multiple functions like finance, purchasing, in- competitor may win on a few di- niches rather than trying to tackle formation technology, human resources, mensions of value and take certain everything)? The threat needs to and executive training. The scale advan- customers away, but there are still be addressed with humility. The tages they provide are straightforward many other segments to serve! temptation will be great to believe and include pooled purchasing, pre- Dread. Finally, the larger threat that “our way” remains the better ferred access to credit, and other cost- reveals itself. The problem is not way. If anything, overstate the related benefits. Economies of experi- this single entrant; it’s the inevi- fact that it is not, and proceed ence are more difficult to realize but table attack of focused firms on from that assumption to craft a can also be more valuable. Here, the other fronts. competitive response. challenge is to use knowledge gained in one service model to strengthen the performance of the others. To a limited extent, this kind of knowledge transfer occurs informally; resources would do more to strengthen their own businesses. this has always been the hope and promise of diversified Operations managers, meanwhile, raise a chorus of complaint companies. The important difference in successful multi- that shared services require more-vigilant control “below the focused firms is that they formalize the process, designing line” if they are to deliver the necessary economies of scope very explicit ways of leveraging experience across service and experience. Given the perpetual assault on the model, models. Knowledge transfer is facilitated by deliberate in- it may not be surprising that another common characteristic vestments in such programs as formal best-practice sharing; of successful multifocused firms is directive (even autocratic) centralized, dynamic employee training; and the rotation of leadership. This leadership style accommodates different per- managers among models. sonalities, but it always relies on senior managers who are My research convinces me that the best means of sus- able and willing to exert strong influence on subordinates. taining growth in a service business is to employ the multi- They must be, in order to balance the competitive autonomy focused model, yet it is also evident that this model requires of individual service models with the collective value of shared concentrated effort to defend. Leaders of individual service services. Without strong, centralized leadership, revenue- models constantly assert that dedicated, rather than shared, generating line managers typically overrule shared-services hbr.org | April 2008 | Harvard Business Review 79 1084 Frei.indd 79 3/4/08 10:13:20 PM  The Four Things a Service Business Must Get Right managers, particularly in moments of strategic distress. In- As service businesses continue to innovate, succeed, and deed, companies often stack the deck by placing stronger be studied, the answers are becoming clearer. The frame- leaders in the service models than in the shared services, work presented here suggests why the traditional techniques effectively undermining the performance of the system. have proved as durable as they have and why they still leave sophisticated managers wanting more. Much of what de- The Management-Practice Frontier termines the health of a product business – the soundness Management scholars, and not a few practitioners, have of its offering and the management of its people – is just taken up an interesting debate in recent years: Is the dis- as indispensable in a service business and can be addressed cipline of management fundamentally different in service with a similar tool kit. But whole new areas involving businesses than in product businesses? The way in which the roles of customers have opened up, and their tool kits management is studied and taught in graduate business are only now being assembled. schools was forged in the context of the industrial economy. Are the approaches that worked for manufacturing compa- Reprint R0804D nies equally applicable to services? To order, see page 139. Dave Carpenter “I’m here to defrag the Magic 8 Ball.” 80 Harvard Business Review | April 2008 | hbr.org 1084 Frei.indd 80 3/4/08 10:13:27 PM Copyright 2008 Harvard Business Publishing. All Rights Reserved. Additional restrictions may apply including the use of this content as assigned course material. Please consult your institution's librarian about any restrictions that might apply under the license with your institution. For more information and teaching resources from Harvard Business Publishing including Harvard Business School Cases, eLearning products, and business simulations please visit hbsp.harvard.edu.